RBA keeps rates steady and retain easing bias as downside risks remain

By Kymberly Martin

NZ swaps closed up 2bps across the curve yesterday. NZ bonds were little changed.

NZ swaps continue to consolidate after their pull-back from mid-March highs. This is consistent with our view that NZ swaps will now trade in a pattern of higher lows and higher highs.

The market now prices around a 40% chance of the OCR being 25bps higher in a year’s time. We continue to expect a first OCR hike in March next year, and steady hikes thereafter.

Across the Tasman, the RBA left rates unchanged yesterday, as widely expected. The RBA appeared confident they may have done enough (with 175bps of cuts over 18 months), but kept their easing bias intact, as downside risks remain.

Our NAB colleagues expect that weak non-mining sectors, a high AUD, rising unemployment and low inflation will require further cuts. They see the most likely timing of a next cut as June. The market currently prices around a further 20bps of rate cuts in the year ahead.

Overnight, a slightly more optimistic mood in Europe saw German and US 10-year bond yields rise around 3 bps to 1.31% and 1.86% respectively. Italian-German 10-year bond spreads tightened 15bps.

Early this morning, two fairly dovish US Federal Reserve members were out in force. Kocherlakota said “monetary policy should be more accommodative”. Lockhart rejected the idea there was an imminent need to unwind QE saying, “I favour a wait and watch mode for the time being”.

These are not comments that will get US yields breaking higher any time soon. For that we will likely need to look to US labour data.

The next data point will come with tonight’s US ADP employment report that is often seen as a pre-cursor to the more important payroll numbers on Friday.